TJC QP H2CSQ Prelims08.TJC

TEMASEK JUNIOR COLLEGE PRELIMINARY EXAMINATION 2008 ECONOMICS: 9732/01 PAPER 1 Wednesday 17 September 2008 1400-1615 Hours READ THESE INSTRUCTIONS FIRST Do not turn over until you are told to do so. Write your name and CG number on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. At the end of the examination, fasten your work for each question separately . Hand in each CSQ separately. The number of marks is given in bracke ts [ ] at the end of each question or part question. This question paper consists of 7 printed pages. [Turn over

TJC Preliminary Examination 2008 2 Answer all questions. Question 1 The Sugar Industry Extract 1: The UK Sugar Market Sugar, a sweet substance is obtained from the juices of various plants. Due to differences in climatic conditions, sugar beet that thrives well in temperate countries is processed into white sugar while sugar cane that proliferates in the tropical areas is processed into raw and white sugar. British Sugar (BSC) is a firm in an enviable position. As the sole processor of the sugar beet grown in the UK, it enjoys a large share of the market for refined white sugar. In addition it receives a guaranteed price from the European Union (EU) for the sugar it produces. Tate and Lyle (T&L) is a company that also processes sugar in the UK, but uses sugar cane, which is imported from countries outside the EU such as Brazil, Australia and the Caribbean countries. Imports of sugar cane are limited by quotas, which restrict the supply and ensure that BSC faces little competition. Neither BSC nor T&L has any incentive to cut prices. BSC has its production quota set by the Common Agriculture Policy (CAP) of the EU while T&L’s ability to increase sales is limited by the sugar cane import quota. The EU subsidises the export of all surplus sugar and this helps to keep prices in the world market low. In the past BSC has more than once been found guilty of abusing its market power. It has twice been fined by the EU, on the first occasion for blocking the entry of another firm into the market, and later for colluding and price fixing. BSC’s profits have exceeded 20% in every year but one since 1994. In 2001, the margin was 21% compared to the overall profit margin of its parent company (Associated British Foods) of just 6%. It has been estimated that if the guaranteed price were reduced by 11%, profits of 10% could still be earned. The reduction would transfer 123m euros from the company to its consumers. Extracted from GCE ‘A’ Level Examination, November 2004 Extract 2: The EU Sugar Regime3 In operation for the last forty years, the sugar regime has insulated the beet farmers and sugar processors from low prices and vagaries of the world market through intervention. Cane-sugar producers enjoy lower cost of land and labour. Brazil’s cost of producing sugar is four cents per pound 1 while EU producers incur 25 cents per pound. With world prices never rising beyond 15 cents per pound, the EU producers would have been wiped out of existence. Yet they have been able to make substantial profits. This is made possible with import restrictions. The 2004 import tariff stood at 324 per cent. 2 Excess supply makes export subsidies necessary. Attracted by the glitter of profit, refiners produce above the quota ceiling. This non-quota sugar is not eligible for price support or subsidies and is not to be sold domestically. However, under the African, Caribbean and Pacific (ACP) Sugar Protocol some 18 sugar exporting countries that are former European colonies have been given special access to the

EU markets. These ACP countries include Mauritius, Barbados and Fiji. Similar duty-free access to EU has been accorded to least developed countries such as Mozambique, Ethiopia and Malawi under the Everything But Arms (EBA) initiative. Left out of such preferential trade, Brazil, Australia and Thailand lodged a formal complaint to World Trade Organisation (WTO) that EU engaged in ‘cross-subsidisation’ of non-quota sugar exports, and indirect and direct subsidies of quota sugar. EU’s claim that its sugar regime was non-subsidising and self-financing export regime and that its trade preferences for developing countries were consistent with ‘waiver’ from the WTO rules was overturned. Extract 3: Reform of EU Sugar Regime 3 With the aim of securing a competitive sugar beet industry in the EU, short and long-term planning has gone underway. To reduce the glut created by subsidized profit, minimum sugar price will be reduced by 36 per cent without compensation and minimum beet price to be cut by 39 per cent with compensation for 60 per cent of the price reduction. Levies on the sugar industry will be deployed as restructuring fund to incentivise uncompetitive producers to leave the industry. This is complemented by reduction in EU sugar production by 6 – 7 million tones (mt) with a substantial halt to EU sugar exports. However, external protection remains limiting the rise in imports by protective clauses. As the EU unveiled its plans to reform the sugar sector, loud protests were heard. Mixed response was received from the rest of the world. Extract 4: The Global Sugar Market 3 Owing to favourable weather condition on the one hand and owing to the need to earn foreign exchange on the other hand, world sugar production is estimated to expand rapidly reaching 150.6 mt by 2006. The bulk of this increase will come from developing countries. Brazil which is the world’s leading sugar producer will put even more land under cultivation. A more favourable trade agreement with USA coupled with higher yields will see Mexico expanding its production to reach 6.1 mt. Total output in Pakistan, the Philippines, China, Thailand and Vietnam is expected to reach 22.3 mt. Figure 2: World sugar exports and net imports of selected countries Figure 1: World market shares (2001-03) Source: Oxfam Briefing Paper based on International Sugar Organisation and World Bank data TJC Preliminary Examination 2008 3

World consumption is expected to rise to 149.7 mt. the bulk of which is accounted for by developing countries. Developing countries is estimated to consume 101 mt, driven by growth in population and income. Consumption in the EU, the US and South Korea is expected to remain stable. World interest in ethanol as an alternative fuel has whetted the appetite for sugar. Like other primary-produce exporters, sugar ex porters face great market uncertainty which spells trouble for many of the world’s least developed countries where abject poverty is the order of the day. Figure 3: EU guaranteed prices and world prices Source: Oxtam Briefing Paper based on data from World Sugar Organisation, World Bank, European Commission 1World Bank, Landell Mills Commodities, and national data; Oxfam Briefing Paper 2International Sugar Organisation and European Commission; Oxfam Briefing Paper 3Extracted from various sources Questions (a) (i) Compare the EU price of sugar with the world price of sugar over the period shown. [3] (ii) Explain the differences observed and the implication for the EU commission. [4] (b) (i) Identify two characteristics of BSC that suggest that it has strong market power. [2] (ii) Explain another way by which BSC might have prevented the entry of another firm into the market. [2] (c) (i) With the aid of a diagram, explain what the impact would be on BSC’s profits if free trade were allowed i